Three Dark Clouds on the Horizon

As our state legislators get ready to wrap up the 2013 session and eyes are wandering off to the 2014 budget session, there are whispers around the state capitol that we might have more money to spend next year. A couple of years ago such whispers would have been a source of concern that state spending was once again going to grow out of control, but not now.

This session has been characterized by a refreshing awareness among our lawmakers of the need to keep a tight leash on the budget. They know that there are two dark clouds on the horizon: the federal government’s changing policies on coal, and our risky dependency on federal funds.

These clouds are dark enough to motivate spending restraint as our lawmakers prepare for next year’s budget session. But there is also a third cloud that casts an even bigger, more ominous shadow over our state.

More on that in a moment. The first dark cloud, the federal government’s energy policy, has consequences for state revenues. It is unlikely that the Obama administration will choke off our coal production and exports, but there is no doubt that the president’s anti-coal policies are having a dampening effect on the coal industry in Wyoming. The consequences for the state’s coffers are easy to predict.

The second dark cloud, our dependency on federal funds, is also attracting increasing attention among our state legislators. Wyoming gets approximately 25 percent of its total revenues from the federal government, a number that has remained steady for several years.

Suppose Congress and the President get serious about the federal deficit somewhere in the 2014-2016 window. Federal Aid to States would certainly be on the chopping block, which is a good reason for Wyoming state lawmakers to prepare themselves. If Congress decides on spending cuts under stress from, e.g., international financial markets, it is entirely conceivable that we could face 5-10 percent reductions. That translates into a loss of $75-$150 million for Wyoming, based on preliminary 2012 figures from National Association of State Budget Officers.

It would be a leap forward for our state if our elected officials ramped up their newly acquired sense of urgency regarding the potential loss of federal funds. The more they can do to shield us from such losses, the better. We at Wyoming Liberty Group will continue our work on fiscal solutions that can reduce or completely shield us from such losses.

As if this was not enough, there is a third dark cloud on the horizon. This one gets practically no attention in the public conversation about our state’s economy. Recent state GDP numbers from the Bureau of Economic Analysis show that Wyoming is in trouble: we are the only state where the economy has actually shrunk two years in a row during the recession!

The data, which runs through 2011, show that:

In 2009, 44 states saw their inflation-adjusted GDP shrink; Wyoming was fortunate enough to experience a 2.3 growth;

In 2010, only two states, Alaska and Wyoming, saw their GDP’s shrink, by one percent and 0.5 percent, respectively;

In 2011 GDP contracted in six states; Wyoming fared worst with a GDP that was 1.2 percent smaller at the end of the year.

In two out of the three bad recession years, we had the worst economic performance of any state.

This has several serious consequences for our state. The most obvious one is job creation: a shrinking economy needs fewer workers, which means higher-than-otherwise unemployment.

Another consequence is that the non-minerals tax base is not growing, but getting relatively smaller. The state government will therefore over time rely more heavily on volatile revenues from the natural resources industry. Given the increasing uncertainty around coal and the fluctuations in, e.g., natural gas prices this does not bode well for the sustainability of government finances.

Looking a bit further down the road, our state’s poor growth record weakens the prospect of our children finding well-paying jobs in the state. As the rest of the country slowly recovers, we risk becoming an exporter of not just natural resources but also career-hungry young workers.

Of the three dark clouds on the horizon, the poor growth of our state’s economy requires the most effort on behalf of our legislators. Fortunately, it is not as urgent a problem as shielding the state from consequences of massive federal spending cuts, but our elected officials would be well advised to start thinking about what can be done to put our state on a stronger, more sustainable growth path.